CBS.MarketWatch.com

Treasury prices moved lower out of the gate, taking a cue from rising yields on European bonds as funds shifted into European stocks. Investors and traders reaped profits from recent gains.

Bonds had little excuse to move higher as Federal Reserve Chairman Alan Greenspan repeated to a Senate banking panel what he told its House counterpart last week -- that interest rates will need to go yet higher to cool seemingly insatiable demand.

The Treasury market continues to work through expectations for smaller supplies of new debt as the government assumes budget surpluses. Uncertainty surrounding the supply situation has left some market participants confused on how to position for fundamental market news, such as Friday's revision to fourth-quarter GDP and next week's closely-watched employment numbers.

The 30-year Treasury bond lost 17/32 to yield
TYX, -0.93%
6.125 percent. The 10-year note -- now viewed by many as the new benchmark interest rate -- lost 12/32 to yield
TNX, -1.21%
6.267 percent. In the futures pit, the March T-bond contract fell 21/32 at 95-06.

John Canavan, a fixed-income analyst at Stone & McCarthy Research Associates, said he saw the market entrenching for what is expected to be a strong revision to gross domestic product figures for the fourth quarter, due for release Friday.

Meanwhile, on the middle-to-short end, the 5-year lost 7/32 to yield
FVX, -1.07%
6.572 percent, while the 2-year lost 4/32 to yield
TNX, -1.21%
6.594 percent. Bill yields were mixed.

Blue chip stock issues were hammered Wednesday, paced by losses for financial shares as bond yields rose. The Dow Jones Industrial Average
DJIA, -1.24%
was down 79.11 to10225.73. The Nasdaq
$compq
, helped by Internet, semiconductor and computer hardware shares, shot up 168.16 to a record 4550.28. and international indices.

Repeat performance

The Fed chief's comments supported the view for incremental interest-rate tightenings, rather than aggressive hikes.

He repeated his argument that a moderation in equity market gains may be needed to give the economy a necessary soft-landing.

The Federal Open Market Committee next meets March 21 and financial markets have priced in at least a 25 basis point increase to short-term lending rates. The September Fed futures contract -- a barometer for short-term interest rates -- indicates three 25-basis-point tightening adjustments by the end of the third quarter.

On the block

The market has a fresh batch of two-year notes to digest. The $12 billion sale earned a high yield of 6.590 percent -- right on target with where the note was trading in when-issued dealings ahead of the auction -- with a small 18 percent of bids accepted at the high rate.

The issue sold at a price of 99.834 and earned an interest rate, or coupon, of 6.5 percent.

The bid-to-cover ratio, which compares the number of bids to received to those accepted, was 2.66 -- considered by analysts as fairly strong demand.

The corporate bond calendar beefs up this week as well.

To be sold this week are $1.5 billion of seven-year notes by Household Finance Corp., a division of Household International Inc.; $1 billion of 10- year notes from Honeywell International Inc.; $2 billion of five-year notes from KfW International Finance Inc.; and $1.5 billion of five-year notes from AIG Sun America Global Funding.

In addition, about $3.3 billion in asset-backed bonds will come to market this week, analysts said.

Meanwhile, the difference between the yield on the 30-year bond and 2-year note widened to a negative 46.9 from a negative 42.9. The spread between the yield on the 30-year bond and the 10-year note was unchanged at a negative 14.2 basis points. The spread between the yield on a 10-year and 2-year note widened to a negative 32.7 basis points from a negative 28.7 basis points.

Elsewhere, April crude gained 47 cents to $29.39. The Bridge/CRB index lost 1.81 to 210.21. See full story and latest commodity prices.

Looking at currencies, dollar/yen rose 0.3 percent from the previous close to 111.07. Euro/dollar lost 0.1 percent to 1.00250. See international indices and view currency rates.

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